Are you looking to expand your business? Do you want to purchase your own office space? Does your enterprise need to upscale its premises?

If your business is doing well and you want to invest in property, a commercial mortgage could help you to move forward. But it’s not your only option. There are other types of commercial property finance such as auction finance and construction finance but they are shorter term funding options. So is a commercial mortgage right for you? Here’s our guide to help you figure it out.

What is a commercial mortgage?

A commercial mortgage – or business mortgage – is a type of business finance for buying any land or property for business purposes. They are a type of business loan that is secured against a commercial property, such as an apartment complex, warehouse, private office or shopping centre.

There are three main types of commercial mortgage. They are owner occupied, residential buy-to-let and commercial buy-to-let.

Owner-occupied commercial mortgage

This type of mortgage can be used if your company wants to purchase a property and use it for its own business. So perhaps you would like to purchase the office your company already operates from. Or maybe you want to buy a new premise to move into.

For example, a marketing company might take out an owner occupied commercial mortgage to buy its own office. Or a clothes retailer might take out an owner occupied commercial mortgage to purchase a new shop to operate from.

Owner occupied commercial mortgages have a few advantages. Lenders may feel they are less risky than investment mortgages and look at them more favourably. Another advantage is that the rates high-street lenders charge are considerably lower and the terms of the commercial mortgage may be better. Interest rates can be fixed or variable.

Residential buy-to-let mortgage

Another type of commercial mortgage is the residential buy-to-let mortgage. This is the purchase of residential property to be let out to another party. This type of mortgage would commonly be used by professional landlords and buy-to-let limited companies.

So for example, a landlord might take out a residential buy-to-let mortgage to purchase a house to add to his or her property portfolio and to rent to paying tenants. These mortgages are for people who are purchasing as an investment, rather than as a place to live.

The lending criteria and rules are likely to be more strict for taking out this kind of mortgage. The lender is likely to look at the rental income generating potential of the property. A rental income and interest rate stress test can help to determine how much you can borrow.

Buy-to-let mortgages are usually offered on an interest-only basis and monthly payments will only cover the interest. Your capital debt will not go down and you’ll need to pay this amount in full at the end of your term by selling the property or taking out another mortgage. A buy-to-let mortgage also requires a larger deposit than a standard residential mortgage.

Commercial buy-to-let mortgage

Finally, a commercial buy-to-let mortgage works in a similar way to other buy-to-let mortgages, but you can use them for commercial buy-to-lets. In other words, this mortgage is what you’ll need if you plan to let out the property to other businesses, rather than private tenants.

For example, a commercial buy-to-let would be used by a company that wants to purchase a warehouse to let out to another business.

Although the commercial buy-to-let mortgage is similar to other buy-to-lets, the lender will look at different factors to decide whether you’re eligible for one. As a general rule, commercial buy-to-lets will require higher fees and greater interest rates. You will probably also have to put down a bigger deposit than you would for other buy-to-lets. You’ll need good personal credit and your business will need to have a strong track record.

How does a commercial mortgage work?

First, you’ll need to complete and submit an 'asset and liability' form, which can normally be done online. You’ll then be asked to complete the commercial mortgage application form and to provide information about your business. The property will then be valued and legal due diligence will be carried out.

If approved, you’ll receive a mortgage offer.

To apply, you might need to supply:

• Bank statements usually covering the last three months
• Trading figures usually covering the last three years
• Proof of identity and address
• Lease or tenancy agreements.

Is a commercial mortgage right for my business?

If you need a large commercial loan and have the ability to put down a large deposit upfront, then a commercial mortgage might be right for you. But it will also depend on your trading history.

Lenders want to know that your business can afford the mortgage and that you will be able to repay it, so you’ll need two to three years of filed accounts in order to be eligible.

A commercial mortgage is a type of secured loan, meaning you pledge an asset, such as the office space or apartment property, as collateral. The downside to this is that if you default, the creditor takes possession of your asset.

If that sounds daunting, you might want to consider taking out an unsecured business loan instead. This could be a good option if you need a smaller amount of money and have a good credit history. Unsecured loans offer the flexibility to choose how long you have to repay them and you don’t need to use property or any other asset as collateral.

Pros and cons of commercial mortgages

As with any financial product, there are benefits and drawbacks with commercial mortgages.

The benefits

• Any interest you make on a commercial mortgage is tax deductible
• You can rent out the property to generate extra income
• If your property increases in value, your capital could also see an increase
• You’re not subject to rent increases and can alter the property as you please

The drawbacks

• You will need to pay a hefty deposit
• As you are essentially buying a building, moving could be difficult and you would be responsible for looking after it, including repairs
• Interest rates may be high, as commercial loans are a perceived high risk by lenders
• A business mortgage is a secured loan. So if you default you could lose ownership of your real estate

Commercial mortgage FAQs

What can be offered as security?

The most common asset for a small business loan is property, including residential, commercial and rural land.

Different lenders have different preferences about the type of assets they will accept as security. In some instances you may be able to use vehicles or equipment to secure your loan. Some banks say they can also use the value of your business as security.

When it comes to security, it’s not about your property or asset’s market value. What’s important is the remaining equity in the property. In general, you’ll need it to be at least 75 percent of the value of the property you are looking to buy.

Should I use a commercial mortgage broker?

As you can see, deciding whether to take out a commercial mortgage loan is not straightforward. There’s a lot to consider and if you do decide to go for it you will likely need to hand over a large deposit.

A specialist broker can make the application process more manageable. They are experts, with access to a variety of lenders and they can give honest explanations and help you to work out the right option for you.  

How long are commercial mortgages for?

A business mortgage usually lasts from three to 25 years. If you want a shorter-term loan then you might need to look at a commercial bridging loan or development loan.

What are commercial mortgage fees?

Fees involved in getting a commercial mortgage can significantly impact the overall cost of your loan. Here's a breakdown of the common fees associated with commercial mortgages:

1. Arrangement Fees

The arrangement fee, also known as a processing or administration fee, is charged by the lender for setting up your mortgage. This fee is usually a percentage of the loan amount, typically ranging from 0.5% to 1.5%. It covers the administrative costs of processing your application and securing the loan.

2. Valuation Fees

Before approving a loan, lenders require a property valuation to assess its market value and condition. The borrower is responsible for covering the valuation fee, which varies depending on the property's size, type, and location. This fee ensures that the lender is not lending more than the property's worth.

3. Legal Fees

Both the lender and the borrower will need legal representation to handle the mortgage agreement. The borrower typically pays for both parties' legal fees. These fees cover the cost of preparing and reviewing legal documents, ensuring compliance with regulations, and handling the transfer of funds.

4. Broker Fees

If you use a mortgage broker to find the best commercial mortgage deal, you'll likely pay a broker fee. Brokers charge for their expertise in navigating the market, negotiating terms, and finding loans that meet your specific needs. This fee can be a flat rate or a percentage of the loan amount.

5. Early Repayment Charges

Commercial mortgages often come with early repayment charges if you choose to pay off your loan before the end of the agreed term. These charges compensate the lender for lost interest and can be substantial, so it’s important to consider the terms of your mortgage agreement carefully.

6. Commitment Fees

Some lenders charge a commitment fee, also known as a reservation or booking fee, which secures the funds for your loan. This fee is usually non-refundable and is paid when you accept the lender’s offer.